Diploma in Company Secretarial Practice and Regulatory Knowledge ADVANCED COMPANY SECRETARIAL PRACTICE. July 2006

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1 Diploma in Company Secretarial Practice and Regulatory Knowledge IMPORTANT NOTICE ADVANCED COMPANY SECRETARIAL PRACTICE July 2006 EXAMINER S REPORT AND S When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive right answer. In many cases there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated from what might be achieved in the reality of an unseen, time-constrained examination. ASSIGNMENT You are the company secretary of a private company with ten members (of whom three are directors) which wishes to raise further capital. It is the directors intention to raise 20,000 by issuing 20,000 1 ordinary shares ranking equally with the existing shares. The directors have agreed to underwrite the issue personally in equal parts and to take up any shares that are not subscribed for by the members. The directors wish to invite the existing members to subscribe for shares by means of a non-renounceable rights issue. No formal steps have yet been taken to implement this rights issue. As the company secretary, you are required to write a memorandum to the board of directors setting out the necessary procedural steps to implement this rights issue. You should append to your memorandum all the necessary paperwork to complete this process. 1. A board meeting must be convened to resolve upon the rights issue, ensuring that the company has sufficient authorised, but unissued share capital. The price at which the shares will be issued must be determined and a timescale set. Section 90(6) requires the offer to purchase shares to remain open for not less than 21 days, but as the offeror is a private company Section 91 permits it to select a shorter period if permitted by its Memorandum or Articles of Association. Page 1 of 10

2 2. A general meeting must be convened to authorise the directors to allot securities if a Section 80 resolution is not in force. The resolution, setting out the number of shares and the price, must be filed with Companies House. 3. Written undertakings must be obtained from each director in relation to the underwriting of the issue. 4. A Letter of Rights must be drafted to send to individual shareholders giving the number and price of new shares that they are entitled to purchase, a return address and an expiry date. A brief letter/circular may accompany the Letter of Rights. 5. On receipt of the new subscriptions a board resolution must be passed formally allotting the shares and authorising the issue of share certificates to the subscribers, identifying the individual allotment to each shareholder. 6. New share certificates should be sent to each member, and the Register of Members should be revised. 7. The directors should be advised of their liability, if any, to take up additional shares which should be allotted to them after payment has been received. 8. Form 88(2) should be sent to Companies House within one month of the allotment. The compulsory assignment, which covered the unusual topic of a non-renounceable rights issue by a private company, resulted in a high number of outstanding marks being obtained with the average mark being at distinction level. Some candidates omitted to mention that the directors, who were personally underwriting the issue, should be required to enter into a binding agreement with the company to that effect. In one instance a candidate did not realise that the company was a private company. Aside from these omissions, it was especially pleasing to note that not a single candidate borrowed any of the relevant material from the ICSA approved Corporate Secretaryship textbook. All the assignments were well presented and each one demonstrated clear evidence of independent research. The majority of the assignments merit high praise. GENERAL COMMENTS EXAMINATION In some instances candidates answered more questions than the examination required, or omitted to answer parts of a question. It is strongly recommended that candidates study the format of the examination paper from the pilot paper or previous examination papers and pay close attention to the rubric of the examination paper in order to avoid making such errors. In general, the compulsory element of the paper, (Section A), was not well answered, but candidates answers improved considerably when given a choice of questions to answer (Section B). Page 2 of 10

3 QUESTION 1 (a) What persons does Table A permit to be counted in mustering a quorum at an Annual General Meeting? Article 40 Shareholders entitled to vote, proxies and corporate representatives. (b) In what circumstances does Table A provide that a general meeting shall automatically stand adjourned? Article 41 If no quorum is present within 30 minutes of the start time the meeting becomes inquorate. (c) What period of notice does Table A require for a poll which is demanded and not taken immediately, if the time and place of the poll are not announced at the meeting? Article 52 Seven clear days. (d) In what circumstances does Table A require that a validly demanded poll be taken immediately? Article 51 The election of a chairman and a motion to adjourn. (e) How does Table A require a vote to be counted where one of two joint shareholders votes for a motion and the other joint shareholder votes against the motion? Article 55 Only the vote of the senior (first named) holder can be counted. Here the answers varied from poor to excellent. Most candidates however, were unfamiliar with the relevant provisions of Table A and several of the answers were unrelated to the questions which had been set. This was due to candidates latching on to key words in the questions, such as quorum or adjournment, and writing whatever they knew of such topics without taking the time to identify what the question required. Page 3 of 10

4 QUESTION 2 (a) State three items which must appear by law on a company's website. Country of Registration, registered number and registered office address. (b) Name any three statutory registers which must be kept at the company's registered office. Register of charges, copies of contracts creating charges, minutes of general meetings, written resolutions register, copies of contracts to purchase the company s own shares and register of directors and secretary. (c) Who may sign the Annual Return and what are the filing fees for such a return? A director or secretary may sign the Annual Return. The return costs 15 for electronic filing, or 30 if it is filed in hard copy. (d) Draft a Form of Appointment for an alternate director. FORM OF APPOINTMENT TO THE DIRECTORS OF ABC LTD I, Herbert Smith, hereby give notice that I have appointed Thomas Linklater to be my alternate as a director. I ask the board to approve this appointment and to notify their approval to me. Signed. Dated. (e) When directors or management level staff of listed companies wish to deal in shares of that company, which officers of the company can give them clearances to do so? The chairman obtains clearance from the Board, other directors obtain clearance from the chairman, and management staff may obtain clearance from the secretary. Page 4 of 10

5 The answers to this question were a slight improvement on Question 1, but contained a number of inaccuracies and irrelevant material. The majority of candidates were unable to draft an adequate Form of Appointment for an alternate director, and none of the candidates were aware of the current rules for obtaining clearances to deal in the shares of listed companies. QUESTION 3 In respect of a private company limited by shares: (a) State the compulsory contents of the Memorandum of Association.(12 marks) Name, domicile, objects, limited liability of members, capital clause, and an association clause signed by the original subscribers. (b) Draft short form objects for such a company. (6 marks) S3A The objects for which the company is established are to carry on business as a general commercial company. (c) Explain how the objects can be altered and who may protest against such an alteration. (7 marks) S4 Objects can be changed by a special resolution which must be filed with Companies House within 15 days. S6 Dissentients representing 15% of the voting share capital may apply to the court to have the alteration cancelled. The majority of the answers to this question were excellent and showed a good or very good knowledge of the subject area. Some candidates however, were unaware of the procedures for altering a company s objects and protesting against such an alteration, and did not understand what was meant by short form objects. QUESTION 4 (a) Indicate who is entitled to receive notice of a company's Annual General Meeting. (7 marks) Page 5 of 10

6 Auditors, Directors, members, personal representatives (administrators, executors) trustees in bankruptcy. (b) At the Annual General Meeting of XYZ Ltd the Company Secretary became aware of the following: What effect does each of these events have on the validity of the meeting? (i) Due to a postal strike, several members did not receive the notice until seven days before the meeting and were unable to attend as by then they had other commitments on the date of the meeting. (6 marks) Bradman v Trinity Estates (1989) provides that the meeting will be invalid if the notice was dispatched with the knowledge of the postal strike, and that Table A Article 115 cannot be relied upon in such a case. (ii) Three members who had registered to receive the notice electronically were accidentally overlooked as their addresses were kept in a separate file to the Register of Members. (6 marks) Table A Article 39 provides that accidental omission to send the notice shall not invalidate a meeting see also Young v Ladies Imperial Club, Musselwhite v Musselwhite and Re West Canadian Collieries. (iii) One member who attended the meeting was not sent the notice because she was mistakenly recorded as deceased on the Register of Members and only learned of the meeting because another shareholder had appointed her as his proxy. (6 marks) Table A Article 113 provides that members attending a meeting are deemed to have received the notice so this would not invalidate the meeting. This question was very poorly answered and rarely produced a standard sufficient to obtain a pass mark. Very few candidates could accurately state who was entitled to receive the notice of a meeting, and the relevant provisions of Table A in relation to meetings appeared to be unknown to most candidates. The concept of accidental omission to send out the notice of a meeting, governed by Table A, Article 39, although mentioned was neither explained nor understood, and no references were made to the essential explanatory cases on this point. Page 6 of 10

7 QUESTION 5 (a) Where an error is found in signed minutes, what procedure should be followed to correct the minutes? (5 marks) Once signed, minutes can only be altered by a subsequent resolution. This should be crossreferenced to the offending minute, and a neat alteration should be made to it without erasing the original text. (b) How do action minutes differ from other minutes? (5 marks) Action minutes contain a blank right hand margin where the initials or name of the person required to act upon the minute is entered. (c) What are the elements of the art of good minute writing? (5 marks) Minutes should be accurate, brief, concise, impartial, numbered in sequence and written in the past tense. Minutes of resolution should be written in the third person singular. (d) What are minutes of resolution and when are they normally used? (5 marks) Minutes of resolution simply state the fate of the motion put to the meeting and are commonly used for shareholders meetings. (e) What are minutes of narration and when are they normally used? (5 marks) Minutes of narration reveal the salient points of discussion leading up to a resolution and are commonly used for board meetings and committee meetings. Answers to this question ranged from poor to excellent. The majority of the candidates could not explain the elements of good minute writing, or how to correct an error in signed minutes. Action minutes confused many candidates. Furthermore, not all candidates attempted all parts of this question. Page 7 of 10

8 QUESTION 6 As the Training Officer of an external registrar you are due to hold weekly staff training sessions for all staff. Next week the training session will concern the upkeep of the Register of Members. Prepare training notes in bullet point form for distribution to the attendees explaining: (a) The statutory contents of the register. (10 marks) S352 Full names, address, date becoming and date ceasing to be a member, number and class of shares held and the amount paid up. Guarantee companies with more than one class of member must identify the class of each member. S352A requires a statement of when a private company became a single member company, and if the membership increases, a statement of when it ceased to have a sole member. (b) Who may be entered on the register (10 marks) Only persons with a legal identity can go on the register. English partnerships unless registered as Limited Liability Partnerships, and unincorporated associations may not be entered on to the register. A person holding an equitable interest in shares may not be entered on to the register. Individuals separately or jointly, personal representatives, companies, and corporations sole may be entered. (c) The possible locations of the register The registered office or company office where the register is made up, or with an external registrar. (d) Who may inspect the register S356 Members may inspect the register free of charge, non-members may inspect on payment of a fee. There were some truly outstanding answers to this question showing a remarkable knowledge in relation to a company s Register of Members. A number of answers however, contained information that was true and accurate, but which was not required by the question as set. In the main this occurred where candidates, on being asked solely to set out the statutory contents of the Register, also set out a large array of non-statutory material. This suggests that they leapt at the question without pausing to consider what the question Page 8 of 10

9 actually asked. A number of candidates were confused about the persons, natural and legal, who could be entered on the Register and about the rights of inspection of the Register. QUESTION 7 The directors of a newly listed company wish to establish a share incentive plan for its employees. Write a memorandum to the board of directors setting out the operation of such a scheme. MEMORANDUM To: The Board of Directors of ABC plc From: Marion Jones 1 st July 2006 Company Share Incentive Plan The company share incentive plan will require the approval of the Inland Revenue and our shareholders in general meeting and will be administered by Trustco plc, a UK resident trustee. Employees may contribute a fixed monthly sum to the scheme subject to a minimum of 10 and a maximum of 125 which is used by the trustee to purchase partnership shares. These contributions are taken from their gross salary before the deduction of national insurance and income tax and may not exceed 10% of their gross income. For every two partnership shares purchased the company will award one matching share to each employee. Employees are also eligible to receive up to 3000 of free shares in each tax year. The number of free shares awarded is decided on the basis of the appraisal reports provided by the employees line managers. Shares held within the plan are entitled to dividends and the trustees will purchase dividend shares on the employees behalf up to a maximum figure of 1500 per year. The plan will run for a five year period during which employees are permitted to take a payment holiday of up to six months; our plan rules, however, state that employees who take more than one payment holiday are not permitted to re-start contributions to the plan. Employees who leave their employment within one year have their contributions returned in cash, and those leaving within two years forfeit 25 per cent of any free and matching shares that have been awarded to them. Where, however, employment terminates due to death, retirement, redundancy, disability or injury, no shares are forfeited. Shares held within the plan for the full term are not subject to Capital Gains Tax and this may be avoided entirely if shares which are taken out of the plan are transferred to an individual savings account within 90 days. Page 9 of 10

10 Where free and matching shares are taken out of the plan within three years of being granted then employees must pay income tax and national insurance contributions on the value of the shares. If shares are taken out between three and five years then income tax and national insurance contributions are levied on the value of the shares when they were granted or on their value when taken out of the plan if that is lower. If you have any further queries about the company s share incentive plan, please contact me on extension Format and Presentation (5 marks) Content (20 marks) This question produced some exceptionally high quality answers demonstrating an almost perfect knowledge, in some cases, of Share Incentive Plans. It should be noted, however the Employee Share Option Plans are quite different from Share Incentive Plans and that candidates who wrote about the latter may not have read the question properly before they began to answer it. Page 10 of 10